Credit Spread Decomposition: DecomposingBond-Level Credit OAS into Default andLiquidity Components

Dastidar, Siddhartha G.; Phelps, Bruce D.

doi:10.3905/jpm.2011.37.3.070

Cited by 8 publications

(5 citation statements)

References 2 publications

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“…Based on the ideas of Venkatesh (2003), Churm and Panigirtzoglou (2007), Xie, et al (2008), Dastidar and Phelps (2011), Ang and Longstaff (2011) and Alessi and Detken (2011), we extend the model of Sun, et al (2007) to a cross-border context. The empirical framework of Pesaran, et al (1999) is used to process the cross-border heterogeneous panels.…”

Section: Resultsmentioning

confidence: 99%

“…be the fixed effect for firm j in the panel ARDL model of (2), and can be considered as reflecting the idiosyncratic risk in this firm's corporate bond yield in the sense of decomposition argued by Sun, et all (2007) as well as Dastidar and Phelps (2011).…”

Section: Three-factor Credit Spread Decompositionmentioning

confidence: 99%

“…Given that default risks, political or business cycle risks, as well as liquidity risks have been considered as three major corporate bond risk components in literature (see, among others, Dastidar & Phelps, 2011;Xie, Shi & Wu, 2008;Longstaff, Mithal & Neis, 2005;Chen, Lesmond & Wei, 2007;Block & Vaaler, 2004), signals used to proxy these components are often difficult to observe or measure with precision, making it impractical to utilize them directly. As international capital markets integrate, domestic economy is not the primary source of systemic risk any more.…”

Section: Introductionmentioning

confidence: 99%

“…In terms of the econometric treatment on yield data, changes had been used (.e.g., Wilson, 1998;Duffee, 1999;Collin-Dufresne, et al, 2001;Dastidar & Phelps, 2011;Lee, Xie & Yau, 2011) to avoid partially problems arising from non-stationarity and autocorrelation in the level of credit spreads. But it is accompanied by fundamental drawbacks such as the loss of information, and being leptokurtic as indicated by Pedrosa and Roll (1998).…”

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Diversifying Risks in Bond Portfolios: A Cross-Border Approach

Sun

Tsai

2013

SSRN Journal

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This study recalibrates corporate bond idiosyncratic risks in an international context. Applying a statistically powerful risk decomposition scheme, we show in this study that diversification is improved by the addition of a global risk benchmark. We build a long-run stationary yield spread decomposition scheme which provides better diversification effect. In addition to global liquidity and default risk factors, we also include country-specific default risk component, and all of them are free of measurement or availability issues. The idiosyncratic risk component is estimated as a fixed effect along with all the parameter estimates, rather than separately from an exogenous generating process. Our linear model is simple, yet it can be easily and promptly applied by practitioners.

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Section: Resultsmentioning

confidence: 99%

Section: Three-factor Credit Spread Decompositionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Diversifying Risks in Bond Portfolios: A Cross-Border Approach

Sun

Tsai

2013

SSRN Journal

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“…Lastly, reduced-form models, often regression models, use one or several of the liquidity proxies discussed in section 2.1. A non-exhaustive overview of literature would include De Jong & Driessen (2012), Houweling et al (2005), Chen et al (2007), Han & Zhou (2008), Bao et al (2011), Dastidar & Phelps (2011) and Dick-Nielsen et al (2012). All papers use a variety of liquidity proxies, on different bond data sets (by currency, e.g.…”

Section: Literaturementioning

confidence: 99%

Modelling the liquidity premium on corporate bonds

et al. 2015

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The liquidity premium on corporate bonds has been high on the agenda of Solvency regulators due to its potential relationship to an additional discount factor on long-dated insurance liabilities. We analyse components of the credit spread as a function of standard bond characteristics during 2003-2014 on a daily basis by regression analyses, after introducing a new liquidity proxy. We derive daily distributions of illiquidity contributions to the credit spread at the individual bond level and find that liquidity premia were close to zero just before the financial crisis. We observe the time-varying nature of liquidity premia as well as a widening in the daily distribution in the years after the credit crunch. We find evidence to support higher liquidity premia, on average, on bonds of lower credit quality. The evolution of model parameters is economically intuitive and brings additional insight into investors' behaviour. The frequent and bond-level estimation of liquidity premia, combined with few data restrictions makes the approach suitable for ALM modelling, especially when future work is directed towards arriving at forward looking estimates at both the aggregate and bond-specific level.JEL Classification: G12, G22, G24

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Credit Spread Decomposition

Dastidar

Phelps

2012

Encyclopedia of Financial Models

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Around the world pension reforms and a shift in pension risk toward employees have made plan members more responsible for saving and investing for retirement. Governments call for increasing financial literacy and pension awareness of citizens to help them prepare adequately for retirement. They stress that pension communication and information should be made better accessible, more targeted, and easier to understand. Behavioural economists argue that pension communication and information are much less effectiveif effective at allin changing behaviour than defaults and mandatory active choice. This paper contributes to this debate. Using the Netherlands as a case study, we present empirical evidence indicating that even the most simple, targeted and accessible information has very little effect on behaviour. We find that the effect of information is even smaller for low-income groups. We discuss policy implications.

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Credit Spread Decomposition: DecomposingBond-Level Credit OAS into Default andLiquidity Components

Cited by 8 publications

References 2 publications

Diversifying Risks in Bond Portfolios: A Cross-Border Approach

Diversifying Risks in Bond Portfolios: A Cross-Border Approach

Modelling the liquidity premium on corporate bonds

Credit Spread Decomposition

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